DAVID THOMAS QC
Contractual
obligations
of good faith
David Thomas QC
Keating Chambers,
London
The concept of good faith
It is generally accepted, certainly in Australian
jurisprudence, that the good faith standard
requires subjective honesty from the contracting
parties. Beyond this, the standard requires
contracting parties to have regard to legitimate
or reasonable expectations of the other party.
This does not require altruism, subjugation
of self-interest or disregard of one’s own
commercial aims.1 It simply requires a party to
recognise that, in the course of the relationship,
its actions may affect the other party so as to
defeat that party’s reasonable expectations.
The great Australian judge Sir Anthony Mason
describes this as requiring ‘loyalty to the promise
itself and as excluding bad faith behaviour’.2
The concept of ‘good faith’ was described by
Bingham LJ in Interfoto Picture Library v Stiletto
Visual Programmes Ltd,3 as a principle of fair and
open dealing and an overriding principle
existing in other legal systems.
‘In many civil law systems, and perhaps in
most legal systems outside the common law
world, the law of obligations recognises and
enforces an overriding principle that in
making and carrying out contracts, parties
should act in good faith. This does not simply
mean that they should not deceive each
other, a principle which any legal system must
recognise; its effect is perhaps most aptly
conveyed by such metaphorical colloquialisms
as “playing fair”, “coming clean” or “putting
one’s cards face upwards on the table.” It is
in essence a principle of fair open dealing.
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English law has, characteristically, committed
itself to no such overriding principle but has
developed piecemeal solutions in response to
demonstrated problems of unfairness.’
Australian approach to good faith
obligations
It may be said that the courts of Australia and
New Zealand are perhaps more advanced in
their understanding of the notion of good faith
and the obligations it encompasses as part of the
statutory framework. In Australia, the courts have
sought to fill the void caused by the absence of
a general good faith doctrine by various means.
For example, the concept of ‘unconscionable
conduct’ as a ground for relief under the Trade
Practices Act 1974 (TPA) may be said to have
helped to develop the antithetical concepts of
‘good faith’ and ‘fair dealing’.
Part IVA of the TPA contained three sections
that prohibited corporations, in trade or
commerce, from engaging in conduct that is
unconscionable in connection with the supply
of goods or services: sections 51AA, 51AB and
51AC. Section 51AC was added to the TPA in
1998 following concerns that the existing
statutory and common law causes of action did
not adequately protect small businesses against
unfair and exploitative conduct, and was
therefore prompted by a desire to increase
contractual fairness. To achieve this protection,
section 51AC prohibited ‘conduct that is in all
the circumstances, unconscionable’. The notion
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DAVID THOMAS QC
of ‘unconscionability’ as encapsulated in section
51AC imposed a duty to negotiate, perform and
enforce contractual rights in good faith.4
In Renard Constructions Pty Ltd v Minister of
Public Works,5 Priestley JA stated albeit obiter:
‘Although this implication has not yet been
accepted to the same extent in Australia as part
of judge-made Australian contract law, there
are many indications that the time may be fast
approaching when the idea, long recognised as
implicit in many of the orthodox techniques of
solving contractual disputes, will gain explicit
recognition in the same way as it has in Europe
and in the United States.’
By 2001, the New South Wales Court of Appeal
was commenting in Burger King Corporation v
Hungry Jacks Pty Ltd:6
‘A review of cases since Alcatel indicates that
courts in various Australian jurisdictions
have... proceeded upon the assumption that
there may be implied, as a legal incident of a
commercial contract, terms of good faith and
reasonableness.’
In Alcatel Australia Ltd v Scarcella7 and Far
Horizons Pty Ltd v McDonald’s Australia Ltd,8 it was
suggested that the duty of good faith prevents
a contractual party from acting capriciously or
for an extraneous purpose. This accords with
the idea espoused by Justice Paul Finn and
Sir Anthony Mason that a party’s reasonable
expectations should be defended.9
Finally, in Automasters,10 the court stated in the
context of good faith obligations, that where
such a right is artificially manufactured and
exercised ‘capriciously and unreasonably
[without having] due regard to the legitimate
interests’ of the parties, it will be clear that there
has been an absence of good faith.
Good faith under English law
The attitude of the English judiciary towards
implying a practice of good faith between
contracting parties has been in comparison
rather sceptical and cautious. In the leading case
of Walford v Miles,11 the House of Lords rejected
any suggestions that good faith duties should be
implied. Lord Ackner held that an agreement to
negotiate was unenforceable because it lacked
the necessary certainty:
‘The concept of a duty to carry on negotiations
in good faith is inherently repugnant to
the adversarial position of the parties when
involved in negotiations. Each party to the
negotiations is entitled to pursue his (or her)
own interest, so long as he avoids making
misrepresentations.’
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In Bedfordshire v Fitzpatrick,12 the parties entered
into a highways maintenance contract.
Subsequently, disputes arose such that when
instructed to commence work under the
contract, Fitzpatrick asked for a later date. The
Council purported to treat this as a repudiatory
breach and terminated the contract. It was
argued that there was an implied term of the
contract, analogous to the duty not to destroy
the relationship of ‘confidence and trust’ in an
employment contract. Declining to imply such
a term, Dyson J stated that ‘the court should be
very slow to imply into a contract a term, which
is couched in rather general terms... and should
only do so where there is a clear lacuna.... The
alleged implied term was expressed in broad
and imprecise language’. Therefore there was
‘no justification for grafting such a term on to
a carefully drafted contract’, and no greater
need for trust and confidence in a continuous
maintenance contract than in a lengthy single
project contract.
It is principally in the area of procurement
law and specifically in the implication of terms
into tender contracts that good faith has been
allowed to develop.
The case of Scott v Belfast13 in essence deals
with an implied contract between tenderers
and prospective employers. The Court was
required to determine whether the tender
documents gave rise to an implied contract, the
terms of which were that the employer must act
fairly and in good faith and, if so, whether the
implied term of fairness and good faith required
the absence of any material ambiguity in the
tender documents that would significantly
affect the tender. Answering in the affirmative,
the Court held that an implied contract could
arise from the submission of a tender and may
arise by inference from the scheme of the
tendering process and the presumed intention
of the parties. This is an important case which
confirms the proposition that a contract can be
implied between a prospective employer and
tenderer, and further that a term of that implied
contract is that the employer will act fairly and
in good faith.
However, even in this area, caution has been
exercised, notably by Lord Hoffmann in Pratt
Contractors v Transit New Zealand,14 which
provided some clarity to the rather nebulous
concept of acting fairly and in good faith in the
context of tendering contracts.15 A dispute
arose out of a tendering process for the
realigning of a state highway. Pratt alleged that
upon submission of the tender, the terms gave
rise to a preliminary contract which contained
express and implied terms regarding selection
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of the successful tenderer and asserted that
Transit acted in breach of these terms. As both
parties admitted to be bound by the obligation
of good faith, the only issue was the identification
of the necessary standard of conduct required
of the tender evaluation team (TET) in making
its assessment. In his concluding remarks, Lord
Hoffmann stated that what lay at the heart of
acting fairly was acting ‘honestly’ and treating
each of the tenderers ‘equally’. However, the
obligation of good faith and fair dealing did not
mean that the TET had to act judicially.
It is perhaps significant that draftsmen of
standard form contracts have sought to make
express provisions for good faith duties in the
absence of application in the general law. The
NEC contract represents an attempt to override
the traditional objection to good faith and uses
notions of ‘cooperation’ and a ‘spirit of mutual
trust’ which are often used in the context of
good faith and fairness.16
This issue was considered by Jackson J in
Costain v Bechtel 17 with regard to the project
manager’s duty to act in the spirit of mutual
trust and cooperation in a contract based on
the NEC form. Jackson J confirmed that the
project manager’s discretion had to be exercised
in a fair and unbiased manner, holding the
balance between the employer and the
contractor. Particularly, it was noted that the
argument presented by reference to a duty of
good faith, was often used as a synonym for
‘impartiality’ and ‘honesty’.
The most recent trends in English law:
towards good faith?
In the case of CPC Group Ltd (CPC) v Qatari Diar
Real Estate Investment Company (Qatari Diar),18
Mr Justice Vos helpfully summarised English,
Australian and US case law to conclude that good
faith obligations must take their colour from the
commercial context of the contract. The parties
entered into a sale and purchase agreement
which obliged them to use all reasonable but
commercially prudent endeavours to enable the
achievement of payment thresholds for deferred
considerations. The issues for determination
were the requirements for compliance with good
faith and whether by the use of all reasonable
endeavours, a party must subordinate its own
financial interests to obtaining the desired result.
Mr Justice Vos found the decision of the
Supreme Court of New South Wales in Overlook
v Foxtel 19 as particularly pertinent as it dealt with
the interaction between an obligation of good
faith and the parties’ pursuit of their own
CONSTRUCTION LAW INTERNATIONAL Volume 7 Issue 3 October 2012
commercial interests. The Court held that
Qatari Diar’s actions were not motivated by ill
will or bad faith and were not a breach of its
obligations of utmost good faith as it was faithful
to the agreed common purpose and behaved in
a manner that was consistent with CPC’s
justified expectations.
The recent case of Compass Group UK and
Ireland Ltd (trading as Medirest) v Mid Essex
Hospital Services NHS Trust (the ‘Trust’)20 again
raised the issue as to whether a remedy (right to
terminate) is available for breach of an express
good faith obligation.
Medirest and the Trust entered into a
standard NHS contract for the provision of
catering facilities which provided for a
mechanism enabling deductions to be made
from service payments in the event of
performance failures by the contractors
(Medirest). Calculations made in accordance
with this mechanism led to a deterioration of
the relationship between the parties, and within
18 months both sides purported to terminate
the contract.
Clause 3.5 of the contract stated as follows:
‘The Trust and the Contractor will co-operate
with each other in good faith and will take
all reasonable actions as in necessary for the
efficient transmission of information and
instructions and to enable the Trust or, as the
case may be, any Beneficiary to derive the full
benefit of the Contract.’
Mr Justice Cranston considered that the real
issue between the parties concerned the
content of the obligations contained in clause
3.5, namely cooperation in good faith and to
take all reasonable action as was necessary for
the efficient transmission of information and
instruction; and to enable the Trust or any
beneficiary to derive the full benefit of the
contract. The starting point in clause 3.5 was
therefore ‘cooperation’.
‘[Cooperation is] a well understood concept
meaning to work together, or to act in
conjunction with another person. The
precise scope of the duty to cooperate will
take its content from the circumstances and
the nature of the contract concerned. In a
long-term contract such as this the duty to
cooperate necessarily required the parties
to work together constantly, at all levels of
the relationship, otherwise performance of
the contract would inevitably be impaired.
Importantly, any lack of cooperation in
the relationship in this context could have
significant ramifications for patient wellbeing. The duty to cooperate necessarily
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DAVID THOMAS QC
encompassed the duty to work together to
resolve the problems which would almost
certainly occur from time to time in a long
term contract of this nature.’
In this instance, the term ‘good faith’ in
clause 3.5 qualified ‘how the duty to cooperate
was to occur’. At this point, it is necessary to
emphasise that the obligations concerned
the performance of a long-term complex
contract and a common purpose involving the
provision of an important service to members
of the public. The objective standard of conduct
therefore demanded of both parties faithfulness
to this common purpose. Fair dealing and acting
consistently with justified expectations were in
a sense corollaries of that. The wider interests
at stake imposed a further obligation on the
Trust not to act unreasonably in conducting
the contract and in particular not to take
unreasonable actions capable of damaging the
relationship with Medirest, thereby undermining
the purpose of the contract.
While evaluating the express contractual duty
of good faith, the court also considered and
cited two decisions as especially noteworthy,
namely CPC Group Ltd v Qatari Diar Real Estate
Investment Company,21 and Berkeley Community
Villages v Pullen.22
The Medirest case also addressed the issue of
exercising discretionary powers under a
contract in good faith. Given the long-term and
complex nature of the current contract, the
language of the contract conferred upon the
Trust a discretionary power and not a
mandatory obligation, to levy the deductions or
to award the service failure points. The purpose
of the Trust’s powers was therefore to curb
performance failure by Medirest. This
discretionary power should have been exercised
honestly and in good faith and not in an
arbitrary, capricious or irrational manner. The
court held that the Trust’s refusal to back down
on claims despite Medirest’s disputing them,
went to the heart of the commercial viability of
the contract and gravely damaged the necessary
working relationship between the parties.
The court held that the Trust’s behaviour
had not been reasonable and its conduct
damaged the working relationship with
Medirest, thereby breaching the good faith
obligations under clause 3.5. It was found that
the Trust’s breaches revolved around two key
issues: its absurd calculations of service failure
points which led to demands for payment; and
a failure to respond positively when Medirest
protested against the calculations and sought to
resolve the dispute.
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‘The Trust’s material breaches of contract,
including the obligation to cooperate in good
faith, constituted a serious and continuing
breach of its critical obligations, which went to
the very heart of what was meant to be a long
term contract requiring cooperation.’
Conclusion
It cannot be said that Medirest represents a
profound change in English law. It is to some
extent fact-dependent, in that the court laid
emphasis on the duration and nature of the
relationship and its purpose. It also concerns a
detailed provision to which the parties agreed. It
can therefore be said that it does not move English
law closer to the position of general implication
of a duty of good faith in commercial contracts.
There is still clear blue water between English
law and the law of Australia in this respect. But
it is nevertheless significant. Whenever English
judges show willingness to enforce such duties by
granting remedies for their infringement, they
emphasise that ‘soft obligations’, as they have
been disparagingly called, have become a feature
of English contract law and practice.
David Thomas QC is a
member
of
Keating
Chambers in London. He
practices in the UK and
internationally. His special
areas of expertise include
construction, engineering,
infrastructure, energy and
technology projects.
Notes
1 Burger King Corporation v Hungry Jacks Pty Ltd [2001]
NSWCA 187.
2 Sir Anthony Mason, Contract, Good Faith and Equitable
Standards in Fair Dealing, (2000) 116 LQR 66,70.
3 [1989] 1 QB 433.
4 The unconscionable dealing provisions of the TPA are
now contained in part 2-2 of the Australian Consumer
Law in Schedule 2 to the Competition and Consumer
Act 2010 (Cth).
5 (1992) 26 NSWLR 234.
6 [2001] NSWCA 187 (Unreported).
7 (1998) 44 NSWLR 234.
8 [2000] VSC 310 (Unreported, Supreme Court of
Victoria).
9 Paul Finn, ‘Commerce and Common Law and Morality’
(1989) 17 Melbourne University Law Review 87.
10 [2002] WASC 286.
11 [1992] 2 AC 128.
12 62 Con LR 64 (TCC).
13 [2007] NICh 4.
14 100 Con LR 29.
15 JBW Group Limited v Ministry of Justice [2012] EWCA Civ 8;
and Sidey Ltd v Clackmannanshire Council, 2012 SLT 334.
16 Clause 10.1 of NEC3: ‘the Employer, the Contractor, the
Project Manager and the Supervisor shall act as stated
in this contract and in a spirit of mutual trust and cooperation.’
17 [2005] EWHC 1018.
18 [2010] EWHC 1535 (Ch).
19 [2002] NSWSC 17.
20 [2012] EWHC 781 (QB).
21 [2010] EWHC 1535 (Ch).
22 [2007] EWHC 1330 (Ch).
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